It was early 2017 and behind the scenes at Australia’s largest bank, senior executives and lawyers were working hard to devise a secret communications strategy.
Financial intelligence agency AUSTRAC had sent notices to the Commonwealth Bank asking for more information about the bank’s discovery that more than 53,000 large cash deposits in its ATMs had not been reported to regulators as required by anti-money laundering and terrorism laws.
As the bank’s former chief executive, Ian Narev, told court this week, the CBA was concerned about the way the issue would be handled if it did reach the media, “particularly given the general environment around banks.” this time”.
“I think it’s important to understand that if any of these scenarios should happen, the goal of this type of work is that we don’t start from scratch when making decisions.”
Months after the CBA began preparations, one of the worst-case scenarios predicted by Project Concord — as the bank’s anti-money laundering work was called — unfolded.
At noon on August 3, 2017, AUSTRAC announced it would file a lawsuit against CBA. Although it had taken action against Tabcorp for violating anti-money laundering and anti-terrorist financing laws, this was the first time AUSTRAC had taken action against a bank and it sent shockwaves through the financial services sector.
CBA eventually agreed to pay a record $700 million fine to settle the case, at the time the largest civil fine in Australian history. AUSTRAC had managed to send a clear message to other companies about what was at stake.
A detailed account of one of the country’s biggest corporate scandals has been played out in a Sydney courtroom in recent weeks before Judge David Yates, painting a picture of the inner workings of one of Australia’s largest financial institutions, which has been rocked by an ugly episode.
This week, Narev spent nearly three days going through dozens of confidential reports, briefing papers, internal audits and emails as he testified in a class action lawsuit filed by shareholders who lost money when the bank’s share price fell following the AUSTRAC announcement .
Shareholders say CBA knew of the non-compliance several years prior to the announcement and should have disclosed that information to the ASX. But the bank argues that when it first learned of the violations, it was unaware that AUSTRAC would be filing a lawsuit and that there was no price-sensitive information that required disclosure to the market.
“Very important to me at the time”
Ian Narev became Head of Commonwealth Bank in December 2011, moving from Head of Business and Private Banking to the role of Chief Executive. Almost immediately, the court was told this week, he was made aware of problems with the CBA’s anti-money laundering and anti-terrorism processes.
It was a time when global regulators, including AUSTRAC, were paying increasing attention to these issues: in 2012, HSBC had agreed to pay a $1.9 billion fine after failing to protect itself against money laundering, the Mexican Benefiting drug cartels and Standard Chartered paid $340 million in 2012 after conducting transactions for Iran in violation of US sanctions.
Narev told the court he was aware from the start of his tenure as CEO that AUSTRAC was taking increasing interest and a more active role in anti-money laundering regulation.
In late 2013, an internal audit of the CBA’s anti-money laundering framework returned a “red” rating, indicating significant concerns that required immediate attention from executives.
Narev acknowledged that the picture painted by the review was unsatisfactory, but said this week he had been told that overall the framework covered all the regime’s key requirements.
“I remember the audit team telling me that the overall framework, and it says so in the report, was sufficient, which was something that was very important to me at the time,” he said this week.
But in February 2014, AUSTRAC had expressed concerns about the audit, the court heard. It called for monthly meetings and reporting, and close monitoring of progress. PwC has been mandated to conduct a high-level root cause review and make recommendations. PwC’s report also found a number of issues with the CBA’s anti-money laundering and anti-terrorism processes.
Despite these issues, Narev says he was confident at the time that the bank was working to fix them and several initiatives to fix the problem were underway. He met with the then head of AUSTRAC, he told the court, who he recalled had given “generally very positive and constructive feedback … on the range of issues.”
“The only thing a CEO can do with the head of another institution is get an overall view of the bank. I saw that as an extremely important part of my role and important for the years to come,” Narev said.
But in May 2015, another internal anti-money laundering audit report received a red rating. In July, AUSTRAC told CBA executives that they had serious concerns about the recent audit and were considering whether enforcement action was needed, according to a memo from the meeting.
“We have to take this very seriously”
In late 2015, the full extent of the bank’s potential breach was brought to light.
More than 53,000 cash transactions valued at over US$10,000 went unreported to AUSTRAC over a period of more than two years.
The court heard internal emails between Narev and Matt Comyn, who was then the head of the retail bank and is now the managing director, and discussed the discovery.
“It goes without saying that we must take this very seriously,” Narev wrote on September 6, 2015. “I admitted [chief risk officer] Alden [Toevs] know that he should contact AUSTRAC personally about this and offer to talk to me. We need to take a similar high-level stance at AFP.”
In his affidavit submitted to the court for the trial, Narev said that upon learning of the issue, it appeared to him that the immediate cause of the issue had been identified, a remedial program was underway, and the transaction reporting issue was justified Detection.
“The presentation of the problem,” asked Jeremy Stoljar, SC, plaintiffs’ attorney, “is a form of damage control that I present to you. They minimize the importance of the problem”.
“I have a completely different opinion on that,” Narev replied.
“Years after the event, you have attempted to portray a response that is at odds with contemporary documents. What do you say?”
“I don’t think so,” Narev replied.
On August 3, 2017, AUSTRAC announced that it had filed a civil complaint in federal court alleging systemic noncompliance by CBA.
Within CBA, the action was not entirely unexpected. More than a year earlier, she had received a notice from AUSTRAC under the Anti-Money Laundering and Terrorism Act requesting further information and documents. The bank had never received such a message. Another came in September and a third in October.
“It was clear to me at that point … that there was likely to be enforcement action,” Narev said Tuesday.
What surprised Narev, however, was the way AUSTRAC broke the news. Despite expecting the bank to receive advance notice from AUSTRAC, Narev said he received a call from the regulator 15 minutes before a media release was released and the lawsuit was filed.
“That’s exactly what you said you wouldn’t do,” says Narev, who told AUSTRAC’s deputy CEO.
Narev then texted the bank’s chairman and informed the board.
“AUSTRAC’s claims appear to be exactly as expected,” he wrote in an email to the board. “I wanted you to know right away as it’s going to get media attention right away.”
While the view within the bank had been that the conduct constituted a single violation, resulting in a possible $18 million fine, AUSTRAC claimed the bank broke the law 53,750 times.
CBA settled the case for $700 million in 2018. In the days following AUSTRAC’s announcement, Narev announced that he would step down the following year (he is now SEEK’s board chairman). A royal financial services commission was convened within months after several scandals rocked the banking sector.
Five years later, the current class action lawsuit, which is expected to last several weeks, revisits an ugly chapter for CBA that it would rather forget.
The Business Briefing newsletter delivers important stories, exclusive coverage and expert opinions. Sign up to receive it every weekend morning.
#Class #action #lawsuit #reopens #ugly #wounds #CBA #scandal